What to Pay First? Mortgage or Credit Card?

Last updated on May 3rd, 2018

Well, an increasing number of consumers are making sure the plastic is paid before the mortgage, bucking the historical trend and adding to strategic default worries nationwide, according to credit bureau TransUnion.

In the first quarter of 2008, the percentage of consumers current on credit cards but delinquent on mortgages surpassed the percentage of consumers current on their mortgages and delinquent on their credit cards for the first time ever. You might need to read that twice or even three times.

Since then, this trend trend was worsened, with the percentage of consumers who are delinquent on their mortgages and current on their credit cards rising to 6.6 percent as of the third quarter of 2009, up from 4.3 percent in Q1 2008.

Consumers Typically Pay Their Mortgages First

Historically borrowers pay the mortgage first

But a recent trend has shown it to be quite the opposite

Borrowers are paying their credit cards first

And neglecting their home loans

“Conventional wisdom has always been that, when faced with a financial crisis, consumers will pay their secured obligations first, specifically their mortgages,” said Sean Reardon, the author of the study and a consultant in TransUnion’s analytics and decisioning services business unit, in the release.

“However, a recent TransUnion analysis has found that increasingly more consumers are paying their credit cards before making mortgage payments. This analysis reaffirms the results of a previous TransUnion study that examined data between the third quarter of 2006 and the first quarter of 2008.”

It’s even worse in hard-hit foreclosure hotspots like California and Florida; in the Golden State, more than 10 percent of consumers are current on their credit cards but late on the mortgage, up from 3.5 percent in 2007.

In the Sunshine State, the number is above 12 percent, up from just five percent in 2007.

The Trend Is to Give Up on the Mortgage

This is a bad sign

Indicates that homeowners are giving up on the American Dream

Or simply that they’re too far gone to care

With home prices wiping out all equity and then some

The reversal in payment hierarchy could signal that homeowners see mortgage default as inevitable or less of a concern, now that it’s become so widespread.

When something happens a lot, or is commonplace, it becomes less taboo. In the past, missing mortgage payments was probably rare and stigma-worthy.

Today, everyone and their mother seems to be missing payments and/or walking away from their properties. So it’s not seen as a big deal. And it’s a lot easier to rationalize in one’s head.

Or it may just have to do with continued loss of equity, pushing more homeowners to stop paying voluntarily and focus on other, more manageable obligations.

That makes sense too, as there’s a psychological tendency to tackle smaller debts instead of bigger ones. If something is spiraling out of control, or seems too far gone, why bother, right?

Might as well address things you still care about or plan to continue using, as opposed to an underwater mortgage you don’t even want to think about ever again.